A little dated but interesting:
TALES OF THE TAPE: Web Retailers Face
Onslaught Of Giants
By Joelle Tessler
NEW YORK (Dow Jones)--Investors have pinned some of their biggest
expectations for the high-flying Internet sector on Web-based retailers.
These are companies such as Internet bookseller Amazon.com Inc. (AMZN)
and on-line music stores CDNow Inc. (CDNW) and N2K Inc. (NTKI), which
say they are positioned to capitalize on the hottest new opportunity to come
along in retail in years: electronic commerce. Over the past five months, these
stocks have soared to new highs, along with most other big Web names.
But, as more and more traditional big-name retailers, including Kmart Corp.
(KM) and Wal-Mart Stores Inc. (WMT), start selling their wares on the Web,
some say the risks for Web-only retailers are growing as quickly as the
opportunities.
The biggest threat to the online-only retailers may well be the established
brand names and customer loyalties that the off-line giants bring to their Web
operations, said David Simons, managing director of Digital Video
Investments.
"They have brand names consumers are familiar with and comfortable with,"
agreed Volpe Brown Whelan analyst Derek Brown.
Simons believes Egghead.com Inc. (EGGS), a retailer of software and
computer products that recently closed all of its off-line stores and moved its
operations entirely to the Web, offers a good test case for how well an
electronic merchant will fare without a presence in the off-line world.
The big mainline retailers all have large ad budgets to spend on the traditional
media of newspapers, magazines and television, Simons pointed out. And, it
doesn't cost much to add a Web address to a TV commercial or a print ad.
To compete, Web retailers like Amazon.com and the on-line auction service
Onsale Inc. (ONSL) must therefore spend huge amounts of money - on both
traditional advertising and on promotions on other Web sites - to build up their
brands.
Underlining how expensive this can be, Simons stressed that marketing
spending is an ongoing cost."It's not once you have it, you have it," he said. "It
requires constant replenishment and nurturing. ... Brand is not immutable."
It is unlikely that the advertising budgets of small on-line players such as
Onsale, which has annual revenue of $88.9 million, can keep pace with
established off-line giant such as Kmart, with its $32.18 billion in annual
revenue.
As a result, the on-line retailers are posting losses and have been forced to
finance their marketing efforts with the proceeds from initial public offerings
and secondaries, Simons said.
"People are looking only at the upside of the Web," said David Rocker, general
partner of money manager Rocker Partners who has held short positions in
some Internet stocks. While on-line retailers like to point out that they don't
have to deal with store leases, large work forces and other so-called
bricks-and-mortar costs, "the expenses aren't going away," he said.
As more and more traditional retailers set up shop on the Web, competition
will intensify on-line, of course. But, Rocker believes the nature of the Internet
makes this a particular concern for electronic merchants since the Web makes
comparison shopping easy. After all, a lower price may be just a mouse click -
rather than a car ride - away.
Rocker noted, in fact, that there is technology available on the Web, such as
"shopping agents," that can do comparison shopping and find the best prices
for consumers. This will pressure margins for on-line merchants of
commodity products such as books, Rocker believes. "The ease of use that
makes the Web so enticing to users makes it risky for retailers, he said.
Still, Web-based merchants have advantages over traditional retailers, others
maintained.
For one thing, they have the early lead on-line. This is largely because the big
off-line retailers have been slow to pay attention to the Internet, giving on-line
merchants a chance to build credible Web brands and lock up valuable ad space
on well-trafficked sites such as America Online Inc. (AOL) and Yahoo! Inc.
(YHOO), said Brown of Volpe Brown Whelan
"They filled the void," explained William Blair analyst Abhishek Gami. "This
is a unique time in history when you can develop a brand that no one has ever
seen before and build a real company."
According to Steve Harmon, vice president of business development and senior
investment analyst at Mecklermedia Corp. (MECK), these companies' early
experiences on-line, and the expertise they gained, help them "figure it out."
Harmon added that the Web-only players have a much greater incentive to
succeed on-line since their very survival depends on it. "Those that live or die
by the Net are much more motivated," Harmon said.
Meanwhile, Gami said, many traditional retailers that have paid scant attention
to the Internet until recently are now "playing catch up." Harmon estimates it
costs at least $100 million for a major retailer to set up shop on-line and lure
buyers. The cost to advertise on other Web sites is "far more expensive than it
was two years ago," noted Kenneth Orton, president and chief executive of
on-line travel service Preview Travel Inc. (PTVL).
Many mainline retailers also are finding that the business practices they use
off-line don't guarantee success in cyberspace. For instance, off-line retailers
must locate warehouses close to their stores and buy goods to suit local tastes,
while Web merchants "need to build a distribution network based on where the
customers are coming from and they can come from anywhere at anytime,"
Orton said.
Moreover, added CIBC Oppenheimer analyst Henry Blodget, "off-line brand
strength ... does not necessarily translate to brand power on-line."
Many real-world retailers face concerns that their on-line operations could
cannibalize their real-world sales.
Orton believes the success of many traditional merchants in the on-line world
will depend in large part on whether they approach the Internet defensively or
offensively. Companies that think they are being attacked - such as Barnes &
Noble, which stepped up its on-line plans after it came to see Amazon.com as a
real threat - tend to shoot from the hip, while merchants that lay out careful
strategies to offer convenience, value and an easy-to-use site will appeal to
consumers, Orton said.
"It seems that Kmart is betting on its brand name attracting an audience
on-line," said Evan Schwartz, author of "WEBONOMICS," a book about
growing businesses on the Net. "But the Web demographic is not the Kmart
demographic, at least not currently. As a group, general retailers have not
done well online. ... It's mainly because they are applying their retail business
model to the Web economy, which doesn't work. The Web calls for new
business models."
Ultimately, Harmon believes, as more and more traditional retailers figure out
how to succeed in cyberspace, the window of opportunity for small upstarts
may start to close. He speculated, for instance, that Amazon.com probably
would not exist today if Barnes & Noble had gone on-line in 1993.
Amazon.com was founded in 1995.
But in the meantime, Harmon said, the on-line retailers "have a two-year
window before the big guys finally figure out this space."
-Joelle Tessler; 201-938-5285 |
